Bear Stearns Hires Law Firm to Probe Hedge Fund Losses

Bear Stearns has hired a law firm to conduct an inquiry into its two collapsed hedge funds tied to risky home loans, a person at the law firm said Friday.

The firm Davis Polk & Wardwell was hired by the audit committee of the investment bank's board of directors to investigate the funds' stakes in the subprime mortgage markets, said the law firm representative, who asked not to be named.

Davis Polk partners Robert Fiske and Lawrence Portnoy will head up the probe, this person said.

A Bear Stearns representative was not immediately available for comment.

Bear Stearns' shares, and its reputation, have been hurt by the collapse of two of its hedge funds, which made large, wrong-way bets on securities underpinned by mortgages to people with poor credit. Defaults by such borrowers have surged.

The company's shares have dropped more than 30 percent this year, and Bear ousted a top-ranking executive, former co-President Warren Spector, amid the turmoil.

The two hedge funds at one point controlled assets of more than $20 billion, but in mid-July Bear said the funds had very little value remaining.

On July 31, the funds filed for bankruptcy protection in U.S. Bankruptcy Court in Manhattan as they attempt to be liquidated in the Cayman Islands, where they are registered.

Earlier this week, a limited partner in one of the failed funds sued Bear Stearns and its asset management division. The lawsuit, in New York State Supreme Court in Manhattan, contends that the investment bank took only small steps to prevent the fund's collapse.

Bear Stearns has said the lawsuit is without merit and that it plans a vigorous defense.